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Social Security: Here Today, Gone Tomorrow

October 27, 2010


Don't worry younger workers. There's hope!

Recently I received my social security statement from the federal government in the mail. Along with my statement was an extra flyer titled “What young workers should know about Social Security and saving.”

            The section that caught my eye was titled, “Will Social Security still be around when I retire?”  This paragraph says:

“Yes. The Social Security taxes you now pay so into the Social Security Trust Fund and are used to pay benefits to current beneficiaries. The Social Security Board of Trustees now estimate that based on current law, in 2037, the Trust Funds will be depleted.  Because people are living longer and the birth rate is low, the ratio of workers to beneficiaries is falling. Therefore, the taxes that are paid by workers will not be enough to pay the full benefit amounts schedule. However, this does not mean that Social Security benefit payments would disappear. Even if modifications to the program are not made, there would still be enough funds in 2037 from taxes paid by workers to pay about $760 for every $1,000 in benefits scheduled.”

            On the surface this tells me it does not look like social security is going to be there 100 percent for younger workers. It does not go on to say that for a time this year, there was more being paid out in Social Security than what was collected, and in 2015, unless changes are made, there always will be more paid out than what is being collected in payroll taxes.

            Over the years, there has been more paid in to Social Security than what was paid out, so what was done with that extra money? It was put in the Social Security trust fund, which was basically used to pay for other government programs. Right now the U.S. government owes the Social Security trust fund around $2.6 trillion.

            So what does this mean to me? It means that I cannot depend on the government for my retirement. I need to take ownership of my own saving goals so no matter what shape the government’s financial condition is in, I can have confidence in my own financial condition.

            For you, I offer three suggestions to help you prepare for your retirement:

•           No. 1:  Pay off your debts. No matter what investment options you have, you can figure the return on your investment of paying off debts by looking at your current interest rates. Also, removing debt takes away risk in your life. If you have lost your job or you may face a job cut in the future, the monthly payments can become a huge burden if your income goes down.

•           No. 2:  Take advantage of employer matches with 401k accounts. Invest through your employer’s retirement plan if your company matches part of your retirement investments. A 100 percent or 50 percent match automatically gives you a 100 percent or 50 percent return on your investment. However, do not invest fully in your company.  Rather, you should diversify. Think Enron. After you get the full company match, I would not invest more in the 401k because of reason No. 3.

•           No. 3:  Open a Roth IRA account. With a Roth IRA, you invest money on which you have already paid taxes. In the future, as your money grows, you are not taxed. When you retire, money withdrawn from your Roth is tax-free. If you look at the federal government’s current obligations and recent ones it has taken on, it is easy to see we cannot continue as a nation to spend so much more than what is brought in through taxes. Therefore, it is pretty evident we will have higher taxes in the future. Pay your taxes now, invest in your Roth, and in the future, withdraw it without paying taxes again. The money you withdraw from your 401k or a regular IRA will be taxed when you withdraw it, likely at a higher tax rate.

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